If you earn money through a sole proprietorship, partnership, LLC, or S corporation, one of the largest tax breaks available to you may be the qualified business income deduction, usually called the QBI deduction or the Section 199A deduction. Created by the Tax Cuts and Jobs Act of 2017, it allows eligible taxpayers to deduct up to 20% of their qualified business income. The deduction was originally scheduled to expire after 2025, but the 2025 tax law commonly called the One Big Beautiful Bill Act made it permanent and adjusted some of its rules.
The basic idea is simple, but the details get complicated as income rises. This guide explains who qualifies, how the deduction is calculated, the limits that apply to higher earners, and how to claim it on your return.
What Is Qualified Business Income?
Qualified business income is the net amount of qualified items of income, gain, deduction, and loss from a qualified trade or business conducted in the United States. In practice, for most small business owners it is close to net profit, with some important adjustments.
QBI generally does not include:
- Wages you earn as an employee, including W-2 wages an S corporation pays you.
- Guaranteed payments a partnership pays you for services.
- Capital gains and losses, most dividends, and interest income not properly allocable to the business.
- Income earned outside the United States.
QBI is also reduced by certain deductions attributable to the business, such as the deductible part of self-employment tax, self-employed health insurance, and contributions to self-employed retirement plans.
Who Can Claim the QBI Deduction?
The deduction is available to individuals, trusts, and estates with income from pass-through businesses, including:
- Sole proprietors filing Schedule C.
- Partners in partnerships and members of most LLCs.
- Shareholders in S corporations.
- Certain rental real estate owners whose activity rises to the level of a trade or business.
C corporations are not eligible, because they pay tax at the corporate level. Income from a C corporation, such as dividends, does not count as QBI.
The deduction is taken below the line, meaning it reduces taxable income but not adjusted gross income. You can claim it whether you itemize or take the standard deduction.
How the Basic Calculation Works
For taxpayers with taxable income at or below the annual threshold, the deduction is generally the lesser of:
- 20% of qualified business income, plus 20% of qualified REIT dividends and qualified publicly traded partnership income, or
- 20% of taxable income minus net capital gain.
That second limit matters. If your taxable income is low compared with your business income, for example because you have large itemized deductions, the cap based on taxable income may reduce the deduction.
Example: A freelance designer has $80,000 of QBI and taxable income before the QBI deduction of $66,000, with no capital gains. Twenty percent of QBI is $16,000. Twenty percent of taxable income is $13,200. The deduction is limited to $13,200.
Income Thresholds and Phase-Ins
The rules become more complex once taxable income exceeds an inflation-adjusted threshold that the IRS publishes each year, with a higher threshold for married couples filing jointly. Above the threshold, two limitations phase in over a range of income:
- The specified service trade or business (SSTB) limitation.
- The W-2 wage and property limitation.
Starting in 2026, the 2025 law widened the phase-in range to $75,000 above the threshold for most filers and $150,000 for joint filers, up from $50,000 and $100,000. That makes the limitations phase in more gradually. Check the current IRS figures for the threshold that applies to your tax year.
The Specified Service Trade or Business Rules
An SSTB is a business that performs services in fields including health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, and any business where the principal asset is the reputation or skill of its employees or owners. Engineering and architecture are specifically excluded from the SSTB definition.
If you own an SSTB and your taxable income is below the threshold, you can claim the full deduction like anyone else. Within the phase-in range, the deduction is partially reduced. Above the top of the range, income from an SSTB does not qualify for the deduction at all.
The W-2 Wage and Property Limitation
For businesses that are not SSTBs, once your income is above the threshold the deduction for each business is limited to the greater of:
- 50% of the W-2 wages the business paid, or
- 25% of W-2 wages plus 2.5% of the unadjusted basis immediately after acquisition (UBIA) of qualified property, such as buildings and equipment.
This limit can sharply reduce the deduction for high-earning owners of businesses with few employees and little depreciable property. It is one reason some S corporation owners review how much they pay in wages and why property-intensive businesses may benefit more at higher incomes.
The New Minimum Deduction
The 2025 law added a minimum QBI deduction beginning in 2026 for taxpayers who materially participate in an active trade or business. If you have at least $1,000 of QBI from such businesses, the deduction is at least $400, with both figures indexed for inflation in later years. This mainly helps people with small side businesses whose calculated deduction would otherwise be very small.
Rental Real Estate and the QBI Deduction
Rental income can qualify if the rental activity is a trade or business. That determination depends on the facts, such as regularity, continuity, and the services provided. The IRS created a safe harbor in Revenue Procedure 2019-38 under which a rental real estate enterprise is treated as a trade or business if certain requirements are met, including keeping separate books and performing at least 250 hours of rental services per year in many cases, along with contemporaneous records of those services. Triple net leases and properties used as a residence for part of the year generally cannot use the safe harbor.
Failing the safe harbor does not automatically disqualify rental income; it simply means you must meet the general trade-or-business standard.
Aggregation of Multiple Businesses
If you own several businesses, you may be able to aggregate them for purposes of the W-2 wage and property limitation, if they meet common ownership and other requirements. Aggregation can help when one business pays a lot of wages and another has high income but few employees. Once you aggregate, you must generally continue in later years, and you must disclose the aggregation on your return. SSTBs cannot be aggregated.
Losses and Carryforwards
If your combined QBI is negative for the year, you get no QBI deduction, and the net loss carries forward to reduce QBI in the next year. This can surprise owners whose business turns profitable after a loss year and finds the deduction smaller than expected.
How to Claim the QBI Deduction
The deduction is calculated on one of two forms and reported on Form 1040:
- Form 8995, Qualified Business Income Deduction Simplified Computation, for taxpayers with taxable income at or below the threshold who are not patrons of agricultural or horticultural cooperatives.
- Form 8995-A, Qualified Business Income Deduction, for everyone else, including taxpayers above the threshold, with schedules for SSTBs, aggregation, loss netting, and cooperative patrons.
If you receive a Schedule K-1 from a partnership or S corporation, it should report the information you need, such as your share of QBI, W-2 wages, and UBIA.
Planning Tips
- Manage taxable income near the threshold. Retirement contributions and other deductions can keep income below the phase-in range, especially for SSTB owners.
- Review reasonable compensation. S corporation owners must pay themselves a reasonable salary, which affects both payroll taxes and QBI.
- Track rental hours. If you rely on the safe harbor, keep detailed logs.
- Consider entity choice carefully. The QBI deduction is one factor among many when deciding between a pass-through entity and a C corporation.
- Work with a tax professional if your income is above the threshold or you own multiple businesses.
Related reading: Earned Income Tax Credit: Who Qualifies, How It Is Figured, and How to Claim It Correctly and Home Office Deduction: Who Qualifies and How to Calculate It.
Frequently Asked Questions
Q: Do I have to itemize to claim the QBI deduction?
No. The QBI deduction is available whether you take the standard deduction or itemize. It reduces taxable income after adjusted gross income is calculated.
Q: Does my W-2 salary from an S corporation count as QBI?
No. Wages you receive as an employee, including from your own S corporation, are not QBI. Only the business’s remaining net income passed through to you counts.
Q: Is the QBI deduction permanent?
Yes. The 2025 tax law made the deduction permanent, rather than allowing it to expire after 2025, and widened the income phase-in range starting in 2026.
Q: Can a doctor or lawyer claim the QBI deduction?
Yes, if taxable income is below the threshold. Health and law are specified service fields, so the deduction phases out within the phase-in range and is unavailable above it.
Q: Does the QBI deduction reduce self-employment tax?
No. It reduces income tax only. Self-employment tax is calculated on net earnings from self-employment without regard to the QBI deduction.
Q: Can rental property income qualify?
It can, if the rental activity is a trade or business. The IRS safe harbor in Revenue Procedure 2019-38 provides one way to meet that standard, though it is not the only way.
The Bottom Line
The QBI deduction can cut taxable income for pass-through business owners by as much as 20% of business income. Below the threshold, it is relatively straightforward. Above it, the SSTB and W-2 wage rules can change the result significantly. Keep good records, understand which form you need, and plan income levels with the deduction in mind.
This article is for general informational purposes only and is not legal, medical, tax, or financial advice. Rules vary by state and change over time; confirm details with the relevant agency or a licensed professional.
